Fed's Rosengren supports rate hikes, assails rigid rules

BOSTON (Reuters) - Forcing the Federal Reserve to hew to a specific rule for setting monetary policy, as proposed in legislation considered by the U.S. Congress, could lead to "large policy mistakes," a U.S. central banker argued on Friday.

Opening a two-day conference that features Stanford professor John Taylor, author of one of the best-known monetary policy rules, Boston Fed President Eric Rosengren acknowledged that it is essential for policymakers like himself to look to policy rules for guidance.

Indeed, Rosengren said he has been supporting Fed rate hikes because of his concern that unemployment has fallen so low that inflation could be unleashed without tighter monetary policy. That was exactly the kind of threat contemplated by the Taylor rule, which also currently calls for higher rates now.

But to require adherence to a rigid rule, Rosengren said, would be counterproductive because rules do not necessarily capture all the policy options a central bank may need, nor do they necessarily adjust to changes in key economic estimates, like the level of unemployment that can be sustained without giving rise to unwanted inflationary pressures.

"From my perspective, policy effectiveness will be better served, instead, by a more robust formulation of monetary policy that draws on a diverse set of guidelines and benchmarks," Rosengren.

Taylor, who is among candidates considered by President Donald Trump to run the Fed when current Fed Chair Janet Yellen’s term ends in February, looked attentive during Rosengren's presentation and took the podium shortly after to detail his view that rules are key to keeping monetary policy-making from becoming "chaotic."

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)